Cane Company manufactures two products called Alpha and Beta that sell for $175 and $135, respectively. Each product uses only one type of raw material that costs $5 per pound. The company has the capacity to annually produce 117,000 units of each product. Its average cost per unit for each product at this level of activity are given below:
| Alpha | Beta | |||||||
| Direct materials | $ | 40 | $ | 15 | ||||
| Direct labor | 30 | 30 | ||||||
| Variable manufacturing overhead | 18 | 16 | ||||||
| Traceable fixed manufacturing overhead | 26 | 29 | ||||||
| Variable selling expenses | 23 | 19 | ||||||
| Common fixed expenses | 26 | 21 | ||||||
| Total cost per unit | $ | 163 | $ | 130 | ||||
The company considers its traceable fixed manufacturing overhead to be avoidable, whereas its common fixed expenses are unavoidable and have been allocated to products based on sales dollars.
11. How many pounds of raw material are needed to make one unit of each of the two products and what contribution margin per pound of raw material is earned by each of the two products? (Round your answers to 2 decimal places.)
12. Assume that Cane’s customers would buy a maximum of 91,000 units of Alpha and 71,000 units of Beta. Also assume that the raw material available for production is limited to 225,000 pounds. How many units of each product should Cane produce to maximize its profits?
13. Assume that Cane’s customers would buy a maximum of 91,000 units of Alpha and 71,000 units of Beta. Also assume that the raw material available for production is limited to 225,000 pounds. What total contribution margin will it earn?
14. Assume that Cane’s customers would buy a maximum of 91,000 units of Alpha and 71,000 units of Beta. Also assume that the raw material available for production is limited to 225,000 pounds. If Cane uses its 225,000 pounds of raw materials, up to how much should it be willing to pay per pound for additional raw materials? (Round your answer to 2 decimal places.)
Pound per unit
| Alpha | Beta | |
| Pound per unit | 40/5 = 8 | 15/5 = 3 |
Contribution margin per pound
| Alpha | Beta | |
| Selling price | 175 | 135 |
| Variable cost | 111 | 80 |
| Contribution margin | 64 | 55 |
| Pound per unit | 8 | 3 |
| Contribution margin per pound | 8 | 18.33 |
12) Units
| Pound | Unit | |
| Beta | 71000*3 = 213000 | 71000 |
| Alpha | 12000 | 12000/8 = 1500 |
| Total | 225000 |
13) Maximum contribution margin = (1500*64+71000*55) = $4001000
14) Maximum price = 8+5 = $13 per pound
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